The Lean Approach to Order Sizes: Strategies for Reducing Costs and Inventory

Order sizes have a significant impact on inventory levels. Larger order sizes can lead to higher inventory holding costs, while smaller orders can increase ordering and transportation costs. Finding the right balance is essential for effective inventory management and cost reduction. Lean practices offer various strategies to optimize order sizes, reduce costs, and improve overall supply chain efficiency.

The Economics of Order Sizes

Many organizations face challenges in reducing order sizes due to fixed costs associated with each order, such as transportation, purchasing, and setup costs. To economically reduce order sizes, these fixed costs must be minimized.

Key Strategies for Order Size Optimization

1. Single Minute Exchange of Die (SMED): SMED is a Lean tool that reduces changeover times, making it more feasible to produce smaller batch sizes. By converting internal changeover steps (which require equipment to be stopped) to external steps (which can be done while the equipment is running), organizations can significantly reduce changeover time and costs, allowing for smaller and more frequent orders.
2. Blanket Purchase Orders: Implementing blanket purchase orders can reduce administrative costs associated with purchasing. Instead of setting up and approving a purchase order for each delivery, a blanket purchase order covers multiple deliveries over a year, reducing administrative burden and allowing for smaller, more frequent orders.
3. Supplier Partnerships and MOQ Negotiations: Developing partnerships with suppliers and negotiating Minimum Order Quantities (MOQs) can help reduce order sizes. For instance, collaborating on transportation logistics, such as combining shipments from multiple suppliers, can lower transportation costs and enable smaller order quantities.
4. Quality Costs Optimization: Smaller order sizes can increase the frequency of quality checks, potentially raising costs. However, this can be mitigated by relying on supplier quality testing or implementing lot-controlled deliveries, where only the first delivery is tested. Building trust with suppliers through certification programs can also reduce the need for duplicate testing.
5. Creative Solutions for Warehouse Handling Costs: Smaller order sizes may lead to increased handling costs in the warehouse. However, solutions like delivering materials directly to the point of use (POU) or using advanced shipment notices (ASNs) to automate receiving processes can minimize these additional costs.

Conclusion: Balancing Cost and Inventory Levels

Optimizing order sizes is a critical component of Lean inventory management. By reducing fixed costs, building supplier partnerships, and implementing Lean tools like SMED and blanket purchase orders, organizations can achieve smaller, more economical order sizes. This reduces inventory levels, lowers holding costs, and improves cash flow without compromising service levels.

By taking a strategic approach to order size optimization, supply chain organizations can unlock significant value and maintain a lean, responsive supply chain.